29 N.Y. 673, Essex County Bank v. Russell

Citation:29 N.Y. 673
Case Date:January 01, 1864
Court:New York Court of Appeals

Page 673

29 N.Y. 673



DAVID RUSSELL and others.

New York Court of Appeal

January 1, 1864

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[Copyrighted Material Omitted]

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John K. Porter, for the appellants.

I. The Brewster note having been fraudulently obtained from the bank by Comstock, its title was not divested; and the endorsers having been already charged, it could still enforce payment, even though it had placed the cancelling mark on the paper. ( Farrington v. Frankfort Bank, 24 Barb. 554; Watervliet Bank v. White, 1 Denio, 608.)

II. The note in suit was not received in the ordinary course of business.

1. The bank could undoubtedly make a valid transfer of paper which it held, either before or after dishonor; but it is an entirely different question whether, in the exercise of the power conferred by its charter--'to carry on the business of banking by discounting bills, notes and other evidences of debt'--a discount payable in protested paper is a transaction in the ordinary course of business, giving them the right under the law merchant of bona fide holders of embezzled paper. (Laws of 1832, 442, § 3.)

2. On the assumption that Comstock was not a party to the Baldwin paper, the second presentation to the bank of a rejected note for $800, and the extraordinary proposition to take the bulk of the proceeds in dishonored paper of third parties, was such a departure from the ordinary course of business as to put the bank on inquiry.

3. Such a discount was, and should be, at the peril of the party making it, even in respect to the cash advanced. ( Brown v. Taber, 5 Wendell, 566; 3 Hill, 277, 8, per NELSON, Ch. J.; Wiggin v. Bush, 12 Johnson, 310; Nixon v. Palmer, 4 Selden, 400; Stainer v. Tyson, 3 Hill, 279, 282; Gill v. Cubitt, 10 Comm. Law, 154.)

4. The cases on this subject are reviewed, and the rule and its reasons defined with great clearness, in the case of Pringle v. Phillips (5 Sandf. Sup. Co. R. 157, 162 to 173). 'It is sufficient to prove that the circumstances known to him were such as ought reasonably to have excited his suspicions,

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and led him to inquire. ' 'A want of that caution and diligence which an honest man of ordinary prudence is accustomed to exercise in making purchases, is in judgment of law a want of good faith. ' 'Although the question of good faith is that which is commonly submitted to a jury, yet this question involves that of due caution; and he who discounts a bill without using due means to ascertain whether it has been honestly obtained by the holder, takes it at his own peril. ' Citing Ch. J. PARSONS, Mr. Justice DUER says: 'Where the endorsee receives the note under circumstances which might reasonably excite suspicion, he ought, before he takes it, to inquire into its validity; and if he does not, he takes it subject to any legal defense that would defeat a recovery by the payee. '

5. But, in this case, the judge not only held that the plaintiffs were bona fide holders, but rejected the evidence offered, and struck out that introduced to show the contrary--held that it was inadmissible under the answer--and refused to permit the pleadings to be amended, on the ground that the plaintiffs were bona fide holders.

III. The court erred in not permitting the defendants to prove the allegation in their answer, that the balance of the proceeds of the so-called discount was retained by the plaintiff on a precedent debt of Comstock.

1. The fraudulent diversion of the note having been proved, the onus was upon the plaintiffs to show affirmatively that they parted with actual value for the full amount of the note. The evidence of the cashier and of Comstock had left the question in equilibrio, whether Comstock was or was not a debtor on the Brewster note--and whether the amount was retained as payment of his precedent debt, or as the consideration of a transfer--and the judge held that on this state of facts the plaintiffs must be deemed bona fide holders.

2. The Brewster note, at the time of the trial, had been more than four years under protest. What became of it

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after it was obtained by Comstock on the 29th of April, 1854, did not appear, beyond his presumption that it was at home. Comstock, and Brewster the makers, were insolvent at the time of the transaction. Colvin, Allen & Co., who were endorsers, failed shortly after it matured. No attempt had been made to collect it of Ames, during the two years he remained solvent. The maker and endorsers were all insolvent at the time of the trial.

3. Under these circumstances, the note being only collaterally in question, the...

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